Tuesday, 6 June 2017

Bank Deposit Tax Increase in the proposed 2017-18 Budget of Bangladesh


12:00 AM, June 07, 2017 / LAST MODIFIED: 12:27 AM, June 07, 2017

The counterproductive bank deposit tax

The 2017-18 budget of the Government of Bangladesh (GOB) increases taxes on bank deposits by 60 percent, much to the dismay of savers and many economists. This commentary presents some alternative angles from which to evaluate the controversial measure. 

First, tax on bank deposit is taxation of the principal amount invested, that is, the savings or wealth of depositors, as opposed to taxation of the interest income. This clearly constitutes partial expropriation of the depositors' savings/wealth that over time can be highly punitive. For example, consider annually rolling over a one-year term deposit, starting with BDT 100, annual interest rate of six percent and a tax rate of 10 percent on interest income. A 0.8 percent (compared to 0.5 percent) tax on bank deposit will reduce the accumulated sum in 10 years from BDT 161.34 to BDT 156.77, meaning a wealth expropriation of BDT 4.57 by the GOB in the form of deposit taxation. With five percent annual inflation adjustment, the deposit tax reduces the depositor's accumulated sum from BDT 99.05 to BDT 96.24, implying actually an additional loss of BDT 2.81 worth of real goods and services that the depositor could have enjoyed today instead of saving. This is why economists believe that the increased deposit tax is likely to be harmful for increasing or perhaps even retaining the level of domestic savings. 

Some argue that the savers may shift some of their bank deposits to the shadow banking sector, stock market and informal borrowing/lending markets. Reduced deposits would in turn shrink consumer and business loans and other investments of banks. Such a banking disintermediation can hardly be considered conducive to the goals of above seven percent economic growth target and a speedy transition into the coveted upper middle income status. Meantime, funds fleeing the formal banking system may end up spurring illegal trades in drugs and arms and terrorism finance.   

Second, wealth tax in the form of annual taxation of real property holdings is, however, very common globally (e.g. state and/or municipal taxes on assessed values of land, homes, apartments, etc). The difference is that real estate properties in general appreciate over time, both nominally and on inflation-adjusted basis, but bank deposits do not. Thus, bank deposit tax is effectively more exacting, albeit the rate may be lower. 

Third, although taxation of bank deposits of clients seems historically very uncommon, monetary authorities in various countries have at times resorted to taxation of deposits that the banks hold with the monetary authority. This is the case right now in some jurisdictions, e.g. Japan and Sweden, in the form of negative interest rate paid by the monetary authority. Such taxation as a monetary policy tool is used to encourage banks to shift their cash to business lending, to enhance the spread of long-term over short-term interest rates, and to dampen excessive appreciation of the currency. Importantly, however, such a policy does not generate tax revenue for the governments and hence is of no direct help to address budgetary shortfalls. 

Although rare, there are instances (e.g. Italy in 1992, Cyprus in 2013) of one-time capital levy on client deposits to address severe budgetary or financial distress conditions. This is not the case in Bangladesh.   

Fourth, in a way, taxation of bank deposits is like mandatory collection of Zakat al-Mal (based on personal income and property) in excess of Nisab (the minimum amount that a Muslim must have before being obliged to zakat) (approximately, the market value of 85 grams of gold or 612.3 grams of silver) in Saudi Arabia, Pakistan, Sudan, Libya, Yemen and Malaysia, although the 'zakatable' asset categories vary by jurisdiction and religious sect (R. Powell, 2009, https://ssrn.com/abstract=1351024; https://www.islamicbanker.com/education/zakat-al-mal). Pakistan's Zakat and Ushr Ordinance No. XVIII of 1980 stipulates mandatory at-source collection of Zakat on balances in savings accounts, and fixed deposits and certificates with banks, national savings centres and post offices. The rationale for such a system includes discouraging cash hoarding, encouraging productive investments that benefit the community at large, cost efficiency in collection, and distribution to Shariah-compliant beneficiaries according to national/regional needs. 

The key difference of taxation of bank deposit is that the revenues are not dedicated to any specific purpose or beneficiary group. Further, unlike mandatory Zakat collection, the bank deposit tax is levied on non-Muslims as well. But the bank deposit tax shares the revenue collection efficiency and transparency that is highly desirable for Bangladesh. Importantly, however, both systems are prone to the risk of significant instability of funds (withdrawals) from the covered asset categories and institutions around the statutory dates of assessment and collection.   

Fifth, the dash for tax revenue in the new budget is to a marked extent driven by the large infrastructure and power projects for which external finance is either not tapped significantly by choice or is available at higher cost. The sizable cost overrun at Padma Bridge and the now manifold higher cost estimate for the Rooppur Nuclear Power Plant project make the GOB budgetary problem even worse. In this context, it seems that the GOB is executing the much-proclaimed "self-financing" strategy, to some extent, by way of increased tax collected from the bank depositors.                  

Sixth, GOB is facing the dual problems of shrinking tax revenue on deposit interest due to falling rates and the increasing funding need to recapitalise the state-owned commercial banks saddled with mounting loan losses. As such, the increased bank deposit tax may be construed as an easily accessible means for GOB to recover the losses from the same sector (the depositors). Unfortunately though, if depositors reshuffle their asset mix from bank deposits to low income tax vehicles like shares and real estate properties, then the GOB's revenue problem will become worse instead. 

In conclusion, as GOB is cash-strapped while in pursuit of expanded set of big projects, taxation of client deposits in banks at a higher rate is perhaps a very transparent and cost effective way of raising much needed extra revenue. But the GOB could have considered taxation of bank assets (loans and other investments) instead of the deposits of the clients. Although banks may find genuine lending less attractive under such a scenario, a beneficial result for the country would be a reduction in the outsizing of loans based on inflated and dubious collaterals and the practice of new enlarged loans to defaulting borrowers to avoid official defaults.

The writer is a Professor at McGill University, Montreal, Canada. 

E-mail: mo.chaudhury@mcgill.ca, mochaudhury@gmail.com 

Friday, 3 March 2017

Child Marriage Restraint Act 2017 of Bangladesh


12:00 AM, March 03, 2017 / LAST MODIFIED: 12:24 AM, March 03, 2017


Undermining the welfare of children

The newly legislated Child Marriage Restraint Act 2017 (CMRA) of Bangladesh legally permits child marriage (between male below 21 and female below 18) under a "special circumstances" provision (SCP) when it is deemed in the best interests of the marrying children and a court order in this regard is obtained by the parents or guardians. Most rights groups are afraid that the SCP will likely be used inappropriately.

The new law improves upon the 1929 Act in terms of imposition of punitive measures and the administration of enforcement. It is undoubtedly well-intended in strengthening the rights of children, especially females. The question is whether in its current form the law is consistent with other age related codes, is expected to improve the welfare of the targeted beneficiaries and is conducive to the overall national aspirations.   

First, Article 28(4) of the 1972 Constitution stipulates that "Nothing in this article shall prevent the State from making special provision in favour of women or children or for the advancement of any backward section of citizens". The CMRA, however, does not utilise this progressive constitutional provision to reverse the unjust course of historical oppression of women children as their welfare considerations are not incorporated in a more compelling manner.

Second, the Majority Act of 1975 defines a citizen of age 18 or older to be an adult, not requiring a legal guardian. For the male "child adults" (between 18 and 21), the SCP is inconsistent with the acquisition of majority (adulthood); they are legally adults, but their parents/guardians would instead decide their best interests in a child marriage.

Similarly, the voting age for both males and females is 18, and hence a male "child adult" (18 to 21) is assumed to be mature enough to grasp the gravity of and then perform his civic duties; but the same person is perceived incapable of determining his best marital interests under the SCP. The perplexing assumption here is that boys and girls acquire civic sense at the same rate, but the boys lag the girls by three years in understanding their marital interests.           

Third, the age of consent in Bangladesh is 14 for both males and females, and hence children "aged 13 or younger in Bangladesh are not legally able to consent to sexual activity" (Age of Consent in Bangladesh, AgeOfConsent). Since the SCP does not stipulate a minimum age for either sex in a child marriage, it is implicitly suggesting no sexual activity between the child marriage partners until both are at least 14. Also, Bangladesh penal code does not have a "close-in-age" clause that would have permitted sexual activity between child marriage partners close in age, but one or both under 14. The inconsistency of permissible marriage under the SCP and consensual sex under the penal code makes the concept of statutory rape quite vague in the context of a child marriage. As such, not much progress has been made under the CMRA in tackling one of the key vices of underage marriage, namely sexual violence against women.   

Fourth, the Prime Minister has very correctly advocated the need for flexibility in dealing with child pregnancies before marriage. Given the socio-cultural and religious values of Bangladesh, the SCP does indeed provide a legal means for the marital rehabilitation of the child mother and the institution of fatherhood recognition and responsibility on the child father. Sadly though, the child marriage does not eliminate the socio-cultural taint of the child mother conceiving when still unmarried. Thus the stigma of a misbegotten baby cannot be avoided through the SCP or any such legal means. Further, the SCP does not make the health hazards of the child mother any less pressing; if at all, unintended ill consequences of the SCP may include an increase in child pregnancy and the associated deterioration of the health condition of females.

Fifth, one consequence of the phenomenon of child marriage is the higher growth rate of population. Though the optimal growth rate for Bangladesh is debatable, it is clear that maintaining the marriageable ages at 18 and 21 along with the SCP would not dampen the ever increasing demand for homestead and the associated loss of cultivable land, waters and forest areas. Even with vast lands and remarkably high sustained economic growth (over 7 percent), China maintains the highest marriageable ages (20 and 22) in the world (World minimum marriage age: Chart shows the lowest age you can legally get married around the world, The Independent), along with a maximum two-child policy. The common age is 20 in Myanmar, with four times the area of Bangladesh and one third the population; its GDP growth rate has been more than 7 percent since 2012 and its per capita income is also higher (Myanmar: Economic Indicators, Trading Economics). It seems that increasing the marriageable age in Bangladesh could have been helpful in boosting the GDP growth rate above 7 percent and expediting its path to the upper middle income status.           

Lastly, the legal provision of polygamy, with (Muslims) or without (Hindus) court approval, needs to be revisited. (Indian polygamy law is instead more permissive for Muslims). Polygamy is discriminatory against females and differential rules based on religion violate the constitutional principle of secularism. More importantly, it needs to be legally ensured that the SCP would not permit polygamy in the context of child marriage.       

To conclude, the CMRA needs to be integrated with other age related codes. If a key goal of the CMRA is to advance the human rights and welfare of female children, along with the facilitation of higher economic growth and a more habitable country, it needs to be amended. Recommended amendments include a stronger emphasis on and articulation of the best interests of the female child, an increase in the marriageable ages and the age of consent, a minimum age set at the elevated age of consent and exclusion of polygamy in child marriages.


Monday, 27 February 2017

Padma Bridge Saga Continues


12:00 AM, February 27, 2017 / LAST MODIFIED: 11:56 AM, February 27, 2017

Maximum accountability should be the norm

A Canadian court verdict related to the Padma Bridge (PB) consultancy contact has set off widespread proclamation of vindication of the concerned Government of Bangladesh (GOB) superiors, allegations by the Bangladesh ruling regime of a conspiracy by the World Bank (WB) and Dr. Muhammad Yunus, and even demands for lawsuits against the WB for defamation. This commentary explores if such sweeping reactions are justifiable.

Unquestionably the Canadian verdict can be seen as the glass half full from a Bangladesh perspective. It is from a reputable foreign court and does not corroborate the WB'S allegations. Bangladesh has finally found a window of momentary relief from the disease (corruption) that continues to tarnish the international recognition of its stellar economic and social achievements. The sweeping sentiment of the moment is that Bangladesh is not as corrupt as others think!

For its part, the WB has some pressing issues on hand in this regard. Against the merit of not revealing the identity of whistleblowers (whose emails dating back to 2010 ignited the PB saga), the WB needs to reckon with the negative image of an interventionist organisation using only unproven allegations to demand specific governance actions by a sovereign country and then withdraw its support altogether for development projects. While the WB is demanding transparency from sovereign governments, its own actions are contrary to that. While no large organisation is ever beyond governance problems or questions, the WB has not yet done a convincing job of dispelling the globally popular perception of bending rules in favour of selected countries and business interests.

For maximum accountability and transparency, the operating norm should be "guilty until proven innocent" and the burden is to prove innocence. Accordingly the boisterous GOB reactions appear premature.

Having said that, it is not acceptable for the government of any people's republic, to seek refuge in the axiom of "innocent until proven guilty". For maximum accountability and transparency, the operating norm should be "guilty until proven innocent" and the burden is to prove innocence. Accordingly the boisterous GOB reactions appear premature.

First, the Canadian acquittal does not involve any GOB official. [Charges against a Bangladeshi minister were suspended on the grounds of no Canadian jurisdiction and extradition treaty]. While the acquittal does not establish any wrong doing by the officials of SNCL (or GOB), it does not prove its absence either. The acquittal resulted from the judge dismissing the wiretap evidence because he questioned the reliability of the information cited to obtain prior court permissions for wiretapping.

Second, unqualified celebration of the Canadian acquittal provides indirect support for SNCL, a multinational that has faced numerous allegation of corruption. SNCL settled fraud allegations with some Canadian cities and its executives are currently the subject of Libya and McGill University Health Centre corruption cases.

Reportedly SNCL routinely used a budgeting item, Project Consultancy/Commercial Costs (PCC), for bribery payments [http://www.cbc.ca/news/canada/snc-lavalin-international-used-secret-code.... Incidentally, a now acquitted SNCL official's (Mr. Ramesh Shah) notes on a May 2011 trip to Bangladesh, while bidding for the PB consultancy contract, had pencilled in percentage bribery allocations under PCC for senior officials who later became the target of the WB's governance demands. [http://icclr.law.ubc.ca/sites/icclr.law.ubc.ca/files/publications/pdfs/C.... Allegedly, SNCL at the time, ranked second to Halcrow Group Ltd, a British firm, on the recommendation list of the Bangladesh Bridge Project Evaluation Committee [http://www.theglobeandmail.com/report-on-business/international-business.... Two weeks later (June 2011), SNCL instead was recommended for the PB consultancy contract by the GOB to the WB.

Such information, albeit not yet adjudicated, warrants a more guarded reaction. The WB may have shared such specifics with the GOB (and Canadian police) leaving it to the country authorities for possible public disclosure. Unfortunately, neither the GOB nor the Anti Corruption Commission disclosed the WB memos despite the merits [http://www.thedailystar.net/news-detail-251360].

Third, along with the PB case, the WB found evidence of corruption by SNCL in an electricity infrastructure project in Cambodia. In April 2013, SNCL agreed to a 10 year ban on bidding in the WB related projects. Notably, in 2011, the WB suspended new lending to Cambodia over the eviction of poor landowners in Phnom Penh, when urged by the NGOs. [https://www.theguardian.com/global-development/2011/aug/10/world-bank-su.... Previously, in 2009, the WB suspended funding for two of its 25 Kenyan projects, pending investigation of corruption and fraud. [http://reliefweb.int/report/kenya/world-bank-suspends-funds-over-corrupt.... Interestingly, Kenya's Internal Audit Department exposed the two cases. It seems that Bangladesh was likely not singled out by the WB on corruption allegations as suggested by a conspiracy theory (involving Dr. Yunus).

Fourth, the GOB repeatedly argued that there was no corruption since no money actually changed hands. But the WB, Canada and most of the developed countries treat any plan/scheme of corruption as a crime as well. Clearly, prevention is better than cure and Bangladesh is better off adopting this wider definition in its fight against corruption.

To conclude, the Canadian acquittal of the executives of a corrupt Canadian multinational by itself is very thin ice for Bangladesh to march on while trying to become an upper middle income country of clean governance. The WB and any external party would naturally act to promote their interests. It is up to Bangladesh to act, preserve and promote its own by seeking mutual interests, discreetly working out the frictions, and deepening development partnerships, not hostilities.


Monday, 13 February 2017

Sovereign Wealth Fund of Bangladesh


What should we do with a sovereign wealth fund?

The Government of Bangladesh (GOB) has just approved setting up a sovereign wealth fund (SWF) to channel government funds into projects considered vital for the country. A SWF is typically owned and supervised by the central bank or the finance ministry. Sovereign Wealth Fund Institute data indicates that more than two third of $7 trillion funds globally is resource related (mainly oil, gas and mining). China SWFs are an exception, drawing upon huge trade surplus.

The most common mandate of a SWF is to earn superior return on "excess" foreign exchange (FX) reserves by investing abroad and seeking diversified FX returns while minimising the risks of home currency appreciation and a sluggish economy. SWFs for internal development finance are a small minority at best [World Bank Group, 2014: Sovereign Wealth Funds and Long-Term Development Finance]. Many emerging economies are instead obtaining development finance from the foreign investment of rich SWFs abroad [V. Fotak, X. Gao and W. Megginson, 2016, A Financial Force to be Reckoned With? An Overview of Sovereign Wealth Funds]. In fact, many of the home-oriented SWFs became "conduits for corruption, patronage and financial mismanagement" [National resource Governance Institute, 2015, Six Reasons Why Sovereign Wealth Funds Should Not Invest or Spend at Home]. Yet, India launched its maiden SWF in 2015 for internal project finance, but met only limited success in attracting private participation.

Intriguingly, most SWFs are set up in countries with authoritarian governance [Fotak et al, 2016]. Also very few developed economies have a SWF. 

The USD 10 billion SWF will be an entity managed by the finance ministry, with five instalments of $2 billion from the FX reserves of Bangladesh Bank (BB) and paid for by new GOB borrowing. This will reduce BB's FX reserves by 33 percent over five years and simultaneously reduce money circulation outside BB by about BDT 80,000 crore.

First, the main rational cited for funding the SWF with BB's FX reserves is the ready availability of "matching" FX funds requirement of projects when they are financed with FX loans from foreign banks. It is not clear, however, why the GOB could not obtain the necessary FX from BB in an expedient manner if and when needed. If $10 billion FX is with the SWF, the idle amount needs to be invested in a liquid form so that it can be tapped easily. But there is no reason to believe that the SWF managers would earn better return on such liquid investments than BB. Meantime, BB would lose access to this $10 billion for its policy implementation.  

Second, as the domestic banking sector would mainly purchase the planned Treasury Bonds issuances by the GOB for this purpose, loanable funds will end up diverted to the SWF from the private sector clients. Further, to the extent the GOB is unable to raise and repay the funds due to budgetary pressure and market circumstances, BB will end up remaining invested in the SWF, but without any control over the use of the SWF funds. It is also not apparent how this mechanism would enhance the returns on BB's FX reserves, an often cited reason for central bank's involvement in a SWF.

Third, it is debatable whether SWF is necessary and the best way to finance Bangladesh's infrastructure projects. This is clearly not the chosen means of development finance for most emerging economies (not resource-based) and the vast majority of SWFs worldwide do not invest much in development projects at home. It is not known how the financed infrastructure projects would generate revenue, be profitable and thus pay back the SWF's investment with return in excess of the GOB's borrowing cost.

Fourth, the prospective power projects may, in principle, generate revenue and are bankable. But the past track record indicates that the private corporate partners end up reaping excessive benefits at the cost of the Republic and the users. Unless the experience reverses, it might not be prudent to draw down BB's FX reserves to this end.

Fifth, there is a history of huge cost overruns in the infrastructure and power projects of Bangladesh. The estimated cost of the key Padma Bridge has already gone up by more than 200 percent. The Rooppur Nuclear Power project is not yet fully finalised with the Russian agency and its estimated cost has already soared from about $2-$3 billion to around $12 billion. While the Russian agency will provide a loan, the rate is not concessional. Additionally, GOB has to pay Russia for ongoing consulting, nuclear fuel purchase and waste management using FX. It will be undesirable if the BB's FX reserve ultimately ends up in countries such as Russia with little FX earnings prospects for Bangladesh from there to replenish the reserve.  

Sixth, given the miserable performance history of state managed enterprises, especially the financial institutions, the nation is better off with a BB owned and managed SWF if there is to be one. Except for the electronic fund transfer mishap, BB has provided stable and able financial leadership in the rather turbulent sea of politicisation, patronage, graft, scams and crashes. Further, empirical evidence indicates that the performance of SWFs deteriorate with political leadership involved in governance [S. Bernstein, J. Lerner, and A. Schoar, 2009, The Investment Strategies of Sovereign Wealth Funds, Harvard Business School Working Paper].                   

To conclude, the enviable $30 billion plus FX reserves of BB was built on the back of Bangladeshi labour toiling under a punishing desert sun in the Mid-East and inadequately compensated young females risking and sometimes losing their lives in some unsafe RMG factories. They have duly earned the first right to any beneficial use of this reserve. It is also in the nation's interest to keep nourishing the golden geese. It is thus only fair and strategically prudent to create a BB owned and managed SWF that will invest in ventures such as pension, insurance, housing and education schemes for the low-income wage earners abroad and RMG workers at home and their families, state of the art manufacturing facilities for the smaller RMG factories under a lease and buyback plan, and the like.           


Email: mo.chaudhury@mcgill.ca, mochaudhury@gmail.com.

Monday, 30 January 2017

Hate Unlimited, Where Is Love?

Hate Unlimited, Where Is Love?

January 30, 2017

Irresponsible leaders and preachers worldwide have unleashed such hate and intolerance that love risks being extinct. The religious and political extreme right is feeding on populist resentment of diversity of faith and faces, while the ultra-seculars are vigorously campaigning to bring shame and culpability of all evils to faith and the faithful. There is no middle any more, only unfathomable ends drifting away, shredding humanity to radioactive black hole of repulsion. 

Love seems like a hypocritical phrase at such hours of reckoning. Hopes are hopeless and prayers are preyed upon.